<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED DECEMBER 31, 1997
OR
/ / TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-13746
FIREPLACE MANUFACTURERS, INC.
(Exact Name of Registrant as specified in its charter)
California 95-3244946
- ----------------------------------------------- ---------------------------
(State or other jurisdiction of Incorporation) (I.R.S. Employer I.D. No.)
2701 South Harbor Boulevard, Santa Ana, California 92704
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 549-7782
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period than the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
The number of shares outstanding of each of the Registrant's classes of Common
Stock as of February 6, 1998, was as follows:
Common Stock, $0.01 Par Value per share - 3,326,775
Documents incorporated by reference. None
<PAGE>
PART I
FINANCIAL INFORMATION
The following comparative financial statements for the three and nine month
periods ended December 31, 1997, have not been audited by independent public
accountants; but, in the opinion of management, all adjustments necessary to
present fairly the results of operations for the periods have been included.
The statements have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures, normally included in the financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to such rules and regulations.
Operating results for the nine month period ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 1998. It is suggested that the condensed financial statements be read
in conjunction with the financial statements and accompanying notes included in
the Company's 1997 Annual Report on Form 10-K.
2
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1997 MARCH 31
(UNAUDITED) 1997
----------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $336,000 $333,000
Trade accounts and notes receivable, less
allowance for doubtful accounts of $318,000,
at December 31, 1997, and $272,000 at
March 31, 1997 1,850,000 2,307,000
Inventories (Note 2) 1,893,000 1,847,000
Prepaid expenses and other assets 99,000 118,000
Deferred Income Taxes 421,000 421,000
---------- ----------
TOTAL CURRENT ASSETS 4,599,000 5,026,000
Property and Equipment at cost, Net (Note 3) 1,501,000 1,761,000
Other Assets 202,000 150,000
---------- ----------
$6,302,000 $6,937,000
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable 1,414,000 2,042,000
Current portion of long-term debt (Note 4) 25,000 212,000
Accrued Liabilities 1,556,000 1,454,000
---------- ----------
TOTAL CURRENT LIABILITIES 2,995,000 3,708,000
---------- ----------
Long-Term Debt, less current portion (Note 4) 37,000 235,000
Deferred Income Taxes 281,000 281,000
---------- ----------
TOTAL LONG TERM LIABILITES 318,000 516,000
---------- ----------
Preferred Stock: $1.00 par value, authorized
1,000,000 shares; none issued or outstanding
Common Stock: $.01 par value, authorized
10,000,000 shares; issued and outstanding
3,221,375 shares at December 31, 1997 and
3,447,950 at March 31, 1997 32,000 35,000
Additional Paid in Capital 0 248,000
Retained Earnings 2,957,000 2,430,000
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,989,000 2,713,000
---------- ----------
$6,302,000 $6,937,000
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31 DECEMBER 31
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Net Sales $6,863,000 $8,215,000
Cost of Sales 4,926,000 6,039,000
----------- -----------
Gross Margin 1,937,000 2,176,000
Selling, General, and Administrative Expenses 1,486,000 1,602,000
----------- -----------
Operating Income 451,000 574,000
Interest and Other Expense 2,000 47,000
----------- -----------
Earnings before income taxes 449,000 527,000
Provision for Income Taxes 180,000 211,000
----------- -----------
NET EARNINGS 269,000 316,000
----------- -----------
----------- -----------
Basic and Diluted Earnings per Common Share (Note 7) $0.08 $0.10
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Net Sales $21,992,000 $25,293,000
Cost of Sales 15,946,000 19,293,000
----------- -----------
Gross Margin 6,046,000 6,000,000
Selling, General, and Administrative Expenses 4,581,000 4,576,000
----------- -----------
Operating Income 1,465,000 1,424,000
Interest and Other Expense 16,000 222,000
----------- -----------
Earnings before income taxes 1,449,000 1,202,000
Provision for Income Taxes 580,000 481,000
----------- -----------
NET EARNINGS 869,000 721,000
----------- -----------
----------- -----------
Basic Earnings per Common Share (Note 7) $0.26 $0.22
----------- -----------
----------- -----------
Diluted Earnings per Common Share (Note 7) $0.25 $0.22
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31 DECEMBER 31
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings $869,000 $721,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization before retirements 446,000 525,000
Compensation to reduce notes receivable from
Officers and Stockholders 93,000
Loss (gain) on sale of property and equipment 1,000 (7,000)
Changes in operating assets and
liabilities:
Trade accounts and notes receivable 457,000 136,000
Inventories (46,000) 648,000
Prepaid expenses and other assets (33,000) 55,000
Accounts payable and accrued
liabilities (526,000) (267,000)
----------- -----------
Net cash provided by operating activities 1,168,000 1,904,000
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property and equipment (187,000) (242,000)
Proceeds from sale of property and equipment 7,000
----------- -----------
Net cash used in investing activities (187,000) (235,000)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on long-term debt (385,000) (390,000)
Net payments on revolving credit line (1,030,000)
Repurchase of common stock (593,000) (203,000)
----------- -----------
Net cash used in financing activities (978,000) (1,623,000)
----------- -----------
Net increase in cash and cash equivalents 3,000 46,000
Cash and cash equivalents at beginning of period 333,000 136,000
----------- -----------
Cash and cash equivalents at end of period $336,000 $182,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its presently inactive, wholly-owned subsidiary (Fireplace Industries of
California, Inc.). All material inter-company transactions have been
eliminated. All adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the results of operations have been
included.
2. INVENTORIES
<TABLE>
<CAPTION>
Inventories are comprised of: (UNAUDITED)
DECEMBER 31 MARCH 31
1997 1997
----------- -----------
<S> <C> <C>
Raw Materials $1,353,000 $1,254,000
Work in Progress 265,000 265,000
Finished Goods 275,000 328,000
----------- -----------
TOTAL $1,893,000 1,847,000
----------- -----------
----------- -----------
</TABLE>
3. PROPERTY AND EQUIPMENT
The Company's investment in property and equipment, at cost, less related
accumulated depreciation and amortization is summarized below:
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31 MARCH 31
1997 1997
----------- -----------
<S> <C> <C>
Machinery and Equipment $3,049,000 $2,982,000
Tools, Dies and Molds 1,405,000 1,322,000
Furniture, Fixtures, and Vehicles 602,000 629,000
Buildings and Leasehold Improvements 64,000 64,000
Research and Development Equipment 291,000 279,000
----------- -----------
$5,411,000 $5,276,000
Accumulated Depreciation and Amortization 3,910,000 3,515,000
----------- -----------
$1,501,000 $1,761,000
----------- -----------
----------- -----------
</TABLE>
7
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-Term debt is summarized as follows: (UNAUDITED)
DECEMBER 31 MARCH 31
1997 1997
------------ -----------
<S> <C> <C>
Equipment term loans payable to bank, bearing
interest at the bank's prime rate plus 1% due in
monthly principal amounts of approximately $16,000,
plus interest. The equipment term loans are part
of the agreement covering the line of credit and
are subject to the same covenants. $0 $367,000
Notes payable to a finance company, bearing interest
at 8.75%, due in monthly principal and interest
payments of $2,500 through March 2000. $62,000 $80,000
------------ -----------
$62,000 $447,000
Less current maturities $25,000 $212,000
------------ -----------
$37,000 $235,000
------------ -----------
------------ -----------
</TABLE>
Maturities of long-term debt are as follows: 1998 $25,000; 1999 $25,000 and
2000 $12,000.
5. RELATED PARTY TRANSACTIONS
The Company has two monthly operating leases of equipment with H&H Equities
Incorporated. H&H Equities Incorporated is wholly owned by Willard P. Harris
and John D. Hornsby, officers of the Company and members of the Company's Board
of Directors. The monthly lease payments are $7,119 and totaled $64,071 for the
nine months ended December 31, 1997.
6. STOCK OPTIONS
During 1997, FMI granted options for 835,000 shares at an option price of $2.88.
The options vest evenly over five years from the grant date. No options have
been exercised or expired during 1997.
As permitted under generally accepted accounting principles, grants under these
plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for
grants under the stock option plan. Had compensation cost been determined based
on the minimum fair value method prescribed in FASB Statement No. 123, reported
net income for the nine months ended December 31, 1997 would have been reduced
to $641,000. In determining the pro forma amounts above, the value of each
grant is estimated at the grant date using the minimum fair value method
prescribed in Statement No. 123, with the following weighted-average assumptions
for grants in 1997: no dividends for all years, risk-free interest rate of
5.86%, expected lives of 5 years, and expected amounts to be exercised of 100%.
8
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. EARNINGS PER SHARE DISCLOSURES
Effective December 31, 1997, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 128, "Earnings Per Share", which supersedes
Accounting Principles Board (APB) Opinion No. 15. Statement No. 128 requires
the presentation of basic and diluted earnings per share. Diluted per share
amounts assume the conversion, exercise or issuance of all potential common
stock instruments unless the effect is to reduce a loss or increase the income
per common share from continuing operations. The Company initially applied
Statement No. 128 for its interim period ending December 31, 1997. Since
December 31, 1997, is the first period the Company must apply these provisions,
the reported earnings per share for 1996 have been restated to conform to the
new requirements.
The weighted average number of common shares and common share equivalents
outstanding during the period used to compute basic and diluted earnings per
share is as follows:
<TABLE>
<CAPTION>
Weighted
Average Earnings Per
THREE MONTHS ENDED 12/31/97: Income Shares Share
------ ------ -----
<S> <C> <C> <C>
Basic EPS 269,000 3,271,010 0.08
Effect of Dilutive Securities
Options 0 3,864
Bonus 0 119,100
--------- -----------
Diluted EPS 269,000 3,393,974 0.08
THREE MONTHS ENDED 12/31/96:
Basic EPS 316,000 3,299,507 0.10
Effect of Dilutive Securities 0 0
--------- -----------
Diluted EPS 316,000 3,299,507 0.10
NINE MONTHS ENDED 12/31/97:
Basic EPS 869,000 3,353,737 0.26
Effect of Dilutive Securities
Options 0 1,293
Bonus 0 70,594
--------- -----------
Diluted EPS 869,000 3,425,624 0.25
NINE MONTHS ENDED 12/31/96:
Basic EPS 721,000 3,345,731 0.22
Effect of Dilutive Securities 0 0
--------- -----------
Diluted EPS 721,000 3,345,731 0.22
</TABLE>
9
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(1) LIQUIDITY AND CAPITAL RESOURCES
The Company has lines of credit with a bank for an aggregate $4,000,000 with an
interest rate of .50 percent above prime, payable monthly. At March 31, 1997
and December 31, 1997, there were no amounts outstanding under the lines of
credit. The lines of credit mature August 1, 1998 and are collateralized by
substantially all of the companies assets.
The Company also has available a $500,000 equipment line of credit. The
borrowings under the line bear interest at the bank's prime rate plus 1%. At
December 31, 1997, there were no amounts outstanding under this agreement.
Accounts receivable (before allowance for doubtful accounts) at December 31,
1997 were $2,168,000 compared to $2,579,000 at March 31, 1997. This 16.0%
decrease is primarily attributed to improved credit collections that lowered the
number of days sales were outstanding. Days sales outstanding at March 31, 1997
was 28 compared to 25 at December 31, 1997.
The current ratio has increased 13% as of December 31, 1997 to 1.54:1 from
1.36:1 at March 31, 1997. The Company benefited from improved cash flow by
taking accounts payable discounts at 10 days, plus equipment loans were repaid
which decreased both current and long term liabilities.
The Company has made capital additions of $187,000 during the nine months ended
December 31, 1997. The Company anticipates total purchases of approximately
$250,000 during the fiscal year ending March 31, 1998.
The Company has, and may continue to, repurchase its common stock. Between
March 31, 1997 and December 31, 1997 the Company has repurchased 226,575 shares
of common stock for $593,000. These shares are retired as required by
California law. The repurchase amount above par is appropriately charged first
to Additional Paid In Capital until the account is zero and then against
Retained Earnings. For the nine months ended December 31, 1997 $248,000 was
charged to Additional Paid In Capital and $342,000 was charged to Retained
Earnings.
(2) RESULTS OF OPERATIONS
Sales for the nine months ended December 31, 1997 decreased by 28.9% from the
same nine month period in 1996. Sales for the three months ended December 31,
1997 decreased 16.5% from the same three month period in 1996. These decreases
are attributed to the Company's decision to decrease sales of lower margin wood
burning fireplaces and accessories.
Cost of sales as a percent of sales decreased 3.8% for the nine months ended
December 31, 1997 and 1.7% for the three months ended December 31, 1997 from the
same periods in 1996. Decreases for both the three and nine months are
attributed to increased sales of higher margin gas units, an improved purchasing
program and better controls of labor costs.
Selling, general, and administrative expenses were 20.8% of sales for the nine
months ended December 31, 1997 compared to 18.1% for the same period in 1996 and
were 21.7% for the three months ended December 31, 1997 compared to 19.5% for
the same period in 1996. The increases are attributed to higher bonus accruals
which reflect the higher fiscal 1998 net earnings, plus higher legal expenses
related to the Company's patent lawsuit.
Interest and other expense decreased 92.8% for the nine months and 95.7% for the
three months ended December 31, 1997 from the same periods in 1996. These
decreases are due to interest calculated on lower borrowings.
Net earnings as a percent of sales increased by 1.1% for the nine months ended
December 31, 1997 compared to the same period in 1996. The increase is
attributed to increased sales of higher margin gas units plus lower material,
labor, and interest expense offset against higher bonus accruals and legal
expense. Net earnings as a percent of sales remained the same for the three
months ended December 31, 1997 compared to the same three months in 1996.
10
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(3) YEAR 2000 DISCLOSURE
The Company's computer systems are not compliant with year 2000 requirements.
At this time management is considering several options to gain compliance with
prices ranging from $50,000 to $250,000. Price differences would allow for
other system upgrades to be implemented simultaneously with the year 2000
solution.
(4) FORWARD LOOKING STATEMENTS
Certain information presented in this report constitutes forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from its expectations. In addition to matters affecting the economy
and the Company's industry generally, factors which could cause actual results
to differ from expectations include the following:
* Loss of one or more significant customers
* Reduction in gross profit margins due to competitive pricing pressures
* Changes in governmental regulation or failure to comply with existing
regulation
* Changes in the cost or availability of purchased parts
* Inability to obtain needed additional capital on terms acceptable to the
Company
* Inability to reduce costs while maintaining customer service
* Potential default under line of credit or other material contracts
(5) NEW ACCOUNTING PRONOUNCEMENTS
No related pronouncements were issued this quarter.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS
During the third quarter of fiscal year 1998 the company won a summary judgment
regarding two consolidated actions in the United States District Court for the
District of Minnesota, FMI v. Hearth Technologies, Inc., Case No. 4-96-1080 (D.
Minn.) (ADM/AJB) and Hearth Technologies, Inc. v. FMI, Case No. 4-96-684 (D.
Minn.) (ADM/AJB). The actions involve the validity and alleged infringement of
U.S. Patent No. 4,793,322 which is owned by Hearth Technologies. Hearth
Technologies requested a royalty payment of $50 per direct vent flex unit.
During 1995, the Company had an independent patent attorney review the patents
in question and it was the opinion of that attorney that the Company is not
infringing on the patent. Assuming the claimant could establish infringement (a
point which the Company vigorously disputes), the Company's damages expert has
concluded that a reasonable royalty rate would be less than $10 per direct vent
flex unit. Hearth Technologies has filed an appeal. The Company's independent
counsel feel there is a reasonable likelihood of success in defense of this
action.
ITEM 6
(a) Exhibits
(27) Financial Data Schedule: Incorporated by reference from the Electronic
filing of this report.
(b) Reports on Form 8-K
No Form 8-K was filed during this quarter.
11
<PAGE>
FIREPLACE MANUFACTURERS, INC., AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 9, 1998
FIREPLACE MANUFACTURERS, INC.
BY: WILLARD P. HARRIS
---------------------------
Willard P. Harris
Chief Executive Officer
JANE ANN IOVINE
---------------------------
Jane Ann Iovine
Vice President of Finance
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 336,000
<SECURITIES> 0
<RECEIVABLES> 2,168,000
<ALLOWANCES> 318,000
<INVENTORY> 1,893,000
<CURRENT-ASSETS> 4,599,000
<PP&E> 5,411,000
<DEPRECIATION> 3,910,000
<TOTAL-ASSETS> 6,302,000
<CURRENT-LIABILITIES> 2,995,000
<BONDS> 0
0
0
<COMMON> 32,000
<OTHER-SE> 2,957,000
<TOTAL-LIABILITY-AND-EQUITY> 6,302,000
<SALES> 21,992,000
<TOTAL-REVENUES> 21,992,000
<CGS> 15,946,000
<TOTAL-COSTS> 20,527,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,000
<INCOME-PRETAX> 1,449,000
<INCOME-TAX> 580,000
<INCOME-CONTINUING> 869,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 869,000
<EPS-PRIMARY> .26
<EPS-DILUTED> .25
</TABLE>
